An order block from lesson 4 shows where a move started. The imbalance that move leaves behind shows how forcefully it left, and smart money concepts (SMC) treat a fair value gap as the footprint of that force. Once you can measure it, the gap also gives you an entry that is often tighter than the order block itself.
What you will learn
- How to tell displacement from an ordinary push with a rule you can measure
- The three kinds of imbalance SMC traders mark: fair value gaps, volume imbalances and liquidity voids
- How to choose between an entry at the near edge of a gap and one at its midpoint
- When a gap stops being a place to enter
What does displacement look like on a chart?
Displacement is a fast, one-sided move made of large-bodied candles with small wicks. SMC explains it as a large participant entering the market, because ordinary two-way trading rarely moves price that far, that fast. Whether or not that story is true, the move itself can be measured.
A move counts as displacement under this testable rule when all three are true:
- At least one candle has a body twice the average body of the previous 10 candles, or larger.
- The move closes beyond a swing high or low, giving the break of structure or change of character from lesson 2.
- It leaves at least one fair value gap.
Take a GBP/USD 15-minute chart where the last 10 candle bodies average 6 pips. Candle 1 dips to 1.2694, taking out an earlier low at 1.2698, and has a high of 1.2706. Candle 2 opens at 1.2703 and closes at 1.2725, a 22-pip body, almost four times the average. Candle 3 has a low of 1.2716 and closes at 1.2734, above the swing high at 1.2730. All three tests pass. A slow climb of 5-pip candles to the same high would also break structure, and SMC traders rate that break lower because it shows no urgency.
Which imbalances do SMC traders mark?
A fair value gap (FVG) is the space between candle 1's wick and candle 3's wick when the two do not overlap. In the example, the gap runs from candle 1's high at 1.2706 up to candle 3's low at 1.2716, which is 10 pips, with a midpoint at 1.2711. ICT courses call a bullish gap a BISI (buy-side imbalance, sell-side inefficiency) and a bearish one a SIBI, but the drawing is the same.
A volume imbalance is a gap between the bodies of two neighbouring candles while their wicks still overlap: one candle closes at 1.2725 and the next opens at 1.2727. These are rare on pairs that trade around the clock, because each candle usually opens where the last one closed. They turn up more on share CFDs, where each day starts with a fresh open.
A liquidity void is a long one-way run with several gaps stacked inside it, say 60 pips covered in five candles with almost no overlap. SMC traders mark the whole void as one zone that price may come back into.
Not every gap deserves attention. Give a gap weight when the displacement that created it broke structure, the move started from a liquidity sweep (lesson 3), price has not yet returned to it, and it sits on the right side of the range, which lesson 6 covers. When a gap overlaps the order block that started the move, treat the overlap as the zone to watch. A gap printed in the middle of a sideways range, with no structure break, is just a fast candle.
Do you enter at the edge or the midpoint?
You have two common limit-order entries. Use the same GBP/USD gap from 1.2706 to 1.2716, a stop 3 pips below the swept low at 1.2694, and a target at equal highs at 1.2770, where buy stops are likely resting. The account is a $10,000 Classic account risking 0.5%, or $50, per trade, and GBP/USD moves $10 a pip on one standard lot. All figures are before trading costs.
Entry at the near edge, 1.2716:
- the stop at 1.2691 is 25 pips away, so the size is $50 ÷ 25 = $2 a pip, or 0.20 lots;
- the target is 54 pips away, worth $108, about 2.2 times the risk.
Entry at the midpoint, 1.2711 (ICT calls this level consequent encroachment):
- the stop is 20 pips away, so the size is $50 ÷ 20 = $2.50 a pip, or 0.25 lots;
- the target is 59 pips away, worth $147.50, about 3 times the risk.
The midpoint gives you more reward for the same $50, and you pay for it in missed trades. If price dips to 1.2714 and then runs to 1.2770, the edge order fills and the midpoint order never does. A third option is to wait for a bullish reaction candle inside the gap, which screens out some failures and costs a few pips of price. Pick one method and keep it, because switching trade by trade makes your journal impossible to read. The position size calculator does the lot arithmetic for any stop distance.
When is a gap finished?
Cancel the order and stop treating the gap as an entry zone in any of these cases:
- A candle body closes beyond the gap's far edge, here below 1.2706. The imbalance has failed, and some traders now watch the box as an inverse gap that may act as resistance.
- Price reaches your target liquidity at 1.2770 before it comes back to the gap. The move you wanted to catch has happened.
- Price has already traded into the gap once and reacted. Most SMC traders treat a gap as used after its first test.
The supply, demand and imbalance lesson in the Technical analysis course shows how a gap sits inside a demand zone.
Check your understanding
The last 10 EUR/USD bodies average 8 pips. A 30-pip bullish candle closes above the swing high, candle 1's high is 1.0850 and candle 3's low is 1.0866. What have you found?
Displacement that passes all three tests, and a bullish fair value gap from 1.0850 to 1.0866. It is 16 pips deep, with a midpoint at 1.0858.
Your buy limit sits at a gap's midpoint. Price touches the near edge, never reaches the midpoint, and runs to your target. Was the plan wrong?
No. Missing some trades is the known cost of a midpoint entry, in return for a tighter stop and a larger reward on the trades that do fill. Judge the method over many trades in your journal.
Before your order fills, a 15-minute candle closes below the bottom of your bullish gap. What do you do?
Cancel the order. A body close beyond the far edge means the gap has failed as support.
Key points
- Displacement has large bodies compared with recent candles, closes beyond a swing point and leaves a gap. Measure all three.
- A fair value gap is the space between candle 1's and candle 3's wicks, a volume imbalance is a gap between two bodies, and a liquidity void is a run of stacked gaps.
- An edge entry fills more often with a wider stop. A midpoint entry earns more reward per dollar risked and misses some moves.
- A body close beyond the far edge, a reached target or a first test ends the gap as an entry zone.
Next lesson: Split a dealing range into premium and discount before you enter
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